It was formally announced yesterday that Citigroup had won control of Carlyle and JPMorgan Corsair's stake in KorAm Bank. The world's biggest and most profitable bank fought off competition from existing shareholder, Standard Chartered and Singapore's Temasek to win the bidding.
The deal is conditional, however, on Citigroup winning a tender off to gain control of 80% of the bank and thus force a delisting and rename the bank, Citigroup Korea.
The US bank's desire to rename the bank is natural enough given it was originally owned and founded by its nearest US rival, Bank of America.
The tender offer will not close for two-and-a-half months. If this proves successful it will give Citi a dominant position among foreign banks in Korea, with total assets of $47 billion and 234 branches. This will place Citi ninth in the country by assets, although still considerably trailing market leader, Kookmin which has $157 billion of assets.
KorAm has been in play since last August when Standard Chartered (advised by UBS) surprised the entire market by purchasing a 9.76% stake in the bank from Samsung. The move was inspired. It put Standard Chartered in poll position in the forthcoming auction of Carlyle's stake, but meant that should it lose, it would still likely make a healthy trading gain on the position.
Indeed, based on the price Citi is paying Standard Chartered is set to earn a profit of $120 million on its stake, which it held for six months.
Citi is paying W3.18 trillion ($2.73 billion) for KorAm, which equates to a price of W15,500 a share (versus the W9,187 paid by Standard Chartered). The price represents a 6.7% premium to KorAm's close over the past 30 days and a 17.2% premium to its average close in the past six months. According to data on Bloomberg, the bank is being purchased at a price that represents 1.9 times book value and an estimated PE of 28.17 times - making the bank far more expensive than local comparables.
Citi no doubt likes the fit between its own franchise and that of KorAm, which has been very aggressive in going after the business of high net worth individuals. Not for nothing is the domain name of its website "goodbank".
Citigroup International's chairman and CEO, Sir Deryck Maughan has commented of the deal: "Korea is a strategic priority for Citigroup. The combination of KorAm and Citigroup will create a leading local bank with global capabilities."
The move follows Citi's strategy of buying bricks and mortar in markets it considers emerging-but-core. Its successful acquisition of Bank Handlowy in Poland (of which JPMorgan Corsair was also, ironically, a shareholder) was similar in this respect.
Citi's decision to spend so much cash in Korea must also send out a positive signal to the international investment community that the country has now turned the corner from its consumer debt crisis and is ready to hit the growth track again. Moreover for Citi - thanks to the likely weakening of the dollar against the Korean won - the impact to its dollar-based earnings is likely to be a kicker.
Citi has long been keen on Korea and this is not the first acquisition it has attempted, although it may owe an unwitting debt of gratitude to external events for missing out on the first attempt. Citi was on the verge of buying KEB Card when the September 11 attack occurred in 2001 and this led it to withdraw when New York got cold feet about acquisitions. Given how many problems KEB Card has had since, that was a fortuitous decision.
This time the Korean market and foreign investors are likely to view Citi's move to buy KorAm positively. The delisting will also lead to some fund flows to other Korean bank stocks, which should help to push their valuations slightly higher.
As to the seller, this will be a very successful first exit for the wave of foreign private equity that went into the Korean financial centre in the wake of the 1998 crisis. The Carlyle/Corsair consortium three-and-a-quarter year investment has made a $533 million profit, which equates to a 118.5% total return (or 39.48% annual).
As readers of FinanceAsia magazine will recall, we have been following this transaction intimately since the beginning. Indeed, Citi's acquisition marks a fitting closing chapter for Carlyle boss, Michael Kim who was the previous COO of Citi's Asian investment banking unit; and who in fact was advised by Salomon Smith Barney on the acquisition. Thus has 'Project Goldfinger' come full circle. Below, we reprint (from our December 2000 magazine) the entire history of how Carlyle did the deal which (on completion) will rank as the most profitable private equity deal from non-Japan Asia.
Project Goldfinger
It was 9.30am on a Seoul Saturday morning at the beginning of December 2000, when Michael Kim arrived. With his easy American accent, Hermes jacket and warm handshake, he is not your standard Korean.
But why does he drive a Ssangyong car? Surely, we ask, someone as important and cosmopolitan as Kim should have a Mercedes? Actually, he smiles, this is a Mercedes. It turns out that DaimlerChrysler licensed the building of an exact replica of the Mercedes S class to Ssangyong, which then put its own badge on the car.
"If I drove a Mercedes," says Kim, "it would send out the wrong signals. In Korea it would be seen as showy, and unpatriotic. It's much better for me to drive this car, which to all intents and purposes is a Mercedes."
It is this practicality and cultural sensitivity that makes Kim such a formidable dealmaker in Korea. It was, in fact, his unique background that led buyout firm Carlyle Group to hire him away from Salomon Smith Barney where he was the firm's investment banking chief operating officer, and the youngest investment banking managing director ever created.
Carlyle saw a guy with Wall Street savvy and a deep array of connections in Korea. His father-in-law is TJ Park, who was formerly the prime minister (till mid-2000) and the man credited with building Posco, the world's biggest steel company. Kim was educated in the US, majoring in English lit, however, not business. When he was hired first by Goldman Sachs he proudly admits he encountered for the first time a newspaper called the Wall Street Journal. He swapped books for balance sheets at Goldman and cut his teeth in the frenetic M&A activity of the US, only later to join Salomon Brothers and return to Asia.
In 1999 he was poached again, this time into the world of investment by Carlyle Group - the $14 billion buyout fund based in Washington, DC - and was given a mandate to do something big in Korea, which Carlyle reckons to be the most important Asian market outside Japan.
In the Bond film 'Goldfinger', the plot surrounded an attempt to attack Fort Knox. In the Korean context, Kim's plan was not dissimilar. He wanted to gain control of one of Korea's few healthy banks.
That bank was Koram Bank, and this is the story of how a deal that nearly died on at least six occasions finally got done and broke new ground in Korea. "We have this penchant for James Bond movies," laughs Kim. "All our projects are named after the Bond movies: this was Goldfinger."
The story begins with Bank of America, which was a founder shareholder of Koram, a bank established in 1987 in cooperation with Samsung and Daewoo. Thanks to its merger with Nationsbank, the new management of Bank of America (BoA) wanted out of its 16.8% holding in Koram.
It asked BoA Securities to try and peddle its shares via an auction. "We took a look at it in November 1999," says Kim. "We thought that replacing one shareholder with another was the last thing the bank needed. We could tell right away that there was a huge non-performing loan problem. Their NPLs were well in excess of what they publicised which was about $500 million. We thought it was well over $1 billion. So we proposed a recap. We said forget BoA, we'll just put money into the bank. BoA said no, our priority is to get out and you've got to buy our shares. They stuck to their auction and we put in a half-hearted bid and lost. H&Q Asia ultimately won that auction."
That should have been the end of the story. But Kim wasn't ready to give up.
"Even after we lost the auction we were intrigued by the earnings power of the bank. I went straight to the chairman of the bank, Shin Dong Hyuk, and told him it's great of you to support BoA's efforts to get out, but let's face it, what you need is fresh capital. I told him over several meetings about Carlyle. I explained what we could bring to the table, not as a strategic, but as a financial investor. I explained that we could act as a bridge between this time of distress, when they were clearly underwater, and a time when they could find a permanent owner. He bought into that - somewhat surprisingly. His thinking was somewhat progressive for a career Korean banker."
Kim piqued Shin's interest and by mid-December the chairman was behind the Carlyle deal, leading to an awkward situation vis-a-vis BoA. "Inevitably the strategies went head to head. A board meeting was called to decide which strategy to pursue. The board felt somewhat beholden to BoA, because of their heritage. But survival was also on their minds. At that time, fortunately for us - unfortunately for the bank - the equity markets were closed to Korean banks. If they could have done a $500 million GDR they would have chosen that route."
The only fresh capital around, however, looked to be the $450 million Carlyle was offering.
There was a problem. Carlyle only does deals where it can obtain control, and thus can control its exit strategy after three to five years. Giving up control to a foreigner in Korea is no straightforward issue.
No one understands this better than Kim. "Korea, because of its culture and history, has had a hard time selling to foreigners. Korea's history is one of foreign dominance. There was Chinese dominance in the 18th and 19th centuries, Japan in the early part of 20th century and some would say US influence in the second half of the century. Koreans have thus been very wary of foreign influence and so there's been a heightened sensitivity during the three years of the financial crisis to the reality that Korean crown jewels were being sold to foreigners at bargain basement prices. The board of this bank was very sensitive to this. They could see a situation where Koreans would say, 'You sold one of our healthiest banks to a foreign group below market price.'"
This would prove a common theme in every facet of this transaction, which only closed a couple of months ago - although some reckoned it never would.
But back to December 1999, when the board came to a head.
"It turned out, to our blessing, that I knew three members on the board, and that was pretty important in swinging the vote towards us. The board considered both proposals. For the good of all minority shareholders, it was felt a recap would be more beneficial."
Although Carlyle goes to lengths to avoid being perceived as too aggressive at the board level, Kim stepped in at this point and demanded BoA be recused from voting because it was a direct beneficiary of one of the two choices, putting it in a conflict of interest. Kim's view prevailed and once BoA's two seats were recused, the matter didn't require a vote. Boards in Korea work by consensus, and the remaining 11 Korean members voted unanimously.
"Regrettably for BoA they couldn't sell their shares," says Kim.
H&Q were also disappointed, and declined a Carlyle invitation into its deal.
Carlyle now had exclusivity to begin due diligence. This was just before Christmas and the bank management wanted the three-month process finished by year-end.
Koram claimed it had $350 million of provisions against a bad loan portfolio of $500 million. It also had $400 million of shareholder equity. "We thought they had bad loans of over a $1 billion, which was more than the sum of the equity and provisions. That meant it was effectively a bankrupt company."
Whereas Carlyle wanted its $450 million investment to go toward bad loan provisions, the management wanted most to go toward expanding the equity base so they could raise their BIS ratio from 10% to 13% and claim to be Korea's best-capitalized bank. Customers like well-capitalized banks.
Then came the inevitable and very Korean issue of price.
Carlyle argued that the bank was worth about W9,000 a share. At that time, the bank's stock was trading at between W9,000 and W10,000. While the board expected a fat premium, Carlyle argued that lack of information in the market about Koram's true NPL situation meant W9,000 per share was in fact generous. A memorandum of understanding was signed with the assurance that the price would be revised after a full due diligence, but within a month of Carlyle's entrance in December as a 'white knight', it was being perceived as the bad guy.
"That's where relationships came into play. In the end they had enough faith in the Carlyle Group. We have former US President George HW Bush on our board. We're not a fly-by-night company, and we can't jeopardise our good name for the sake of one deal. That went a long way. And the people on the board knew me for a long time."
Now it was down to doing the mother of due diligence exercises.
On January 10th a preliminary non-binding MOU was signed and due diligence was kicked off on January 14th. "We thought this would be a 3-6 month exercise," says Kim. "We knew we were in for an intensive due diligence process, but we weren't quite prepared for fighting the battle 10 months later."
He says - with the benefit of hindsight - that there was one very ominous meeting on the 17th with Koram Chairman Shin. Kim recalls: "The chairman said we'll cooperate with you fully in due diligence, but don't bother showing up unless you have government approvals to do this thing. I said yada, yada, yada - how difficult can this be? This is a $450 million capital infusion into a Korean bank, how can anyone in the government be opposed? I've got my contacts in government, and with the regulators, and I thought we'd have no problem. I went to the FSC and met with mid-level people and was given positive signs. If this was good for the financial sector, I was told, it should be fine."
Kim says those words of warning kept ringing in his ears in the coming months, as the deal repeatedly fell apart thanks to regulatory problems.
What exactly was this? It was a technical issue. Any shareholder who obtains more than 4% of a healthy bank has to be a financial institution itself. "We are clearly not a financial institution," says Kim. "We're an investor, but we're not a bank. We thought we could get around this. I was confident I could find a loophole or bulldoze through it, given it was such a silly rule - especially in the midst of a crisis. I had faith in the policymaking vision of the regulators and also in my connections.
"In fact, I didn't bargain for the recalcitrance and strength of the concern about selling to foreigners and the public criticism that this would create. This was a control investment of a financial services company - which is the foundation of any economy. We faced huge resistance from the regulators at every level."
The due diligence took three months of 'all-out assault' on the bank. "We spent over $25 million in due diligence expenses alone. We had eight advisors."
Lead advisor was Salomon Smith Barney, which dedicated its financial institutions group to this deal for the next six months - providing 10 senior bankers at the peak. It won the deal in a bake-off with Morgan Stanley, and in some part thanks to Kim's strong relationships over at his former employer, including with investment banking supremo Sanjeev Misra and Eugene Tan, who ran the Goldfinger project team.
"These private equity firms are not that big personnel-wise," notes Tan. "We help by bringing in the analysts, doing the due diligence and bringing some brainpower. This deal was a huge investment of our time - it is the largest private equity investment into the region."
The other advisers were Bain & Co as management consultants, Oliver Wyman as risk consultants, Arthur Andersen as accountants, Samjung Houlihan Lokey as NPL adviser, and Shin & Kim, Kim & Chang and Cleary Gottlieb as legal counsel.
Says Kim: "Samjung did the Kamco auctions. They have this huge database of loans, and can really value them according to westernised parameters. That was essential."
The due diligence lasted from January 17 till the beginning of April. The bank had 80,000 credits and Carlyle looked at every single one of them. It repriced every single loan to get a fix on how much of their bad loans would go bad and how much provisioning was sufficient.
After all the manhours of analysis, Carlyle thought Koram had not $1 billion in NPLs but closer to $2 billion. "They refused to acknowledge that, but to their credit they really opened the bank's books to us," says Kim.
"We disregarded classifications such as doubtful and precautionary. We lumped it all together and said how much recovery can you expect to get on this credit. So for the good credits it was 100%. That's a mark to market approach, and it's based on borrowers' ability to repay. So for each of the borrowers we did leverage analysis and looked at coverage ratios to get to a formula that allowed us to figure out how much of the 100% we could get back. For example, the Daewoo credits - and it varied by companies within the group - many of them were 15 cents on the dollar. That's how we got to the full provision amount of W2 trillion."
Carlyle wanted this amount fully provisioned.
The bank disagreed vehemently with this view, which put its NPLs at four times its own estimate.
"It came down to a simple fact: they were desperate for cash. If they were right in their bad loan assessment, they didn't need our capital. We knew it had to be at least double that. Their attitude in the negotiations convinced us of this. If they weren't so starved of capital, and had no other recourse, they wouldn't have been at the table to start with."
So why did Kim like a bank with such NPLs? Actually, when provisioned the bank's core was excellent. It had strong core earnings and its management, thanks to BoA, had managed to evade Hanbo, Halla, Kia and various other disasters. Its exposure to Daewoo was largely thanks to Daewoo being a shareholder.
Above all, Kim felt it was a great play on the Korean economy, which would eventually be the lynchpin of growth in non-Japan Asia.
But Kim's views were not unanimously shared by those in Carlyle headquarters in Washington DC. Carlyle has three founding partners - David Rubenstein, Bill Conway and Dan D'Aniello - and a seven-person investment committee of which Kim is one. Support was mixed.
Andy Shinn, one of Kim's vice-presidents in Seoul, ran about 100 different scenarios through his financial models and Kim went to DC equipped with them. "The DC partners were brought round by their conviction in the Korean team and the fact that the Korean economy was the best in Asia, and would recover, and if we are going to become a big player in Asia, we needed to make a play on the Korean market. They also thought this would be a franchise-making deal. Carlyle group hadn't made quite the splash that we had hoped for, not like the successes we had had in the US and Europe. Carlyle Asia was established in 1997 and we had only done one deal until Koram."
However, as the due diligence exercise progressed, the investment committee understandably grew nervous - here was a bank that had four times the NPLs it had initially stated. That's not good.
For Kim this was putting all of his institutional credibility to the test. This was far and away the biggest due diligence bill in Carlyle's history. The end figure of $25 million was no mean sum.
"In private equity firms," says Kim "that money comes straight out of the partners' pockets - my pocket - on busted deals."
But an even more sobering moment than swallowing $25 million was about to occur.
Two weeks into the due diligence, the FSC asked Kim: are you a bank? Kim replied no. Well, it replied, you shouldn't do this deal. Kim was back to the 4% problem.
But he thought he'd found a solution by the end of January. Deutsche Bank had approached Carlyle to ask whether it needed financing for the deal. Kim had said no, but the banker had referred Deutsche's private equity arm, Deutsche Capital, to Carlyle anyway.
"We explained our investment thesis to them. They loved the story, and wanted to get in on it. They would be our junior partner. We thought the bank would need $450 million. Deutsche would be in for between $50 and $100 million."
Kim went to the FSC with a structure that saw Carlyle owning 90% of the investment and Deutsche 10%. The FSC replied that in order for the structure to be considered a bank, it had to be majority controlled by Deutche.
"Deutsche spoke to their headquarters in Frankfurt and they said are you crazy? This is just a financial investment, not a strategic one. So we figured out a complicated structure where it appeared that Deutsche was almost our equal. But it fell slightly short. The reason for this was Deutsche's concern that if it was the bank holding company of Koram Bank, it would need to put up capital if Koram Bank went under. By regulation, the parent has to honour such a cash call."
The FSC said make it a 50/50 split. A compromise was suggested where Deutsche had 49.9% but had veto rights over matters such as M&A and capital raising.
It was Valentines Day and Deutsche was about to fall out of love with the deal. The FSC and Koram Bank both leaked the deal to the all-powerful Korean press. Headlines such as: "Biggest bank in the world takes over Koram Bank" appeared.
The FSC had leaked the deal to show the Korean public they were making progress in their ongoing restructuring of the financial sector. Meanwhile Koram Bank leaked it in order to give its flagging stock price a short-term boost. Nor was the leak subtle. Chairman Shin was interviewed on television, and told Korean viewers that this was a vote of confidence in the bank.
"We were stunned," says Kim. "The stock price did go up, but unfortunately we lost our partner."
Deutsche Bank's board in Frankfurt hit the roof and pulled out.
And suddenly it looked like Kim had no deal. Deutsche had been key to getting the FSC's approval.
And suddenly he'd incurred $12.5 million of due diligence costs for a deal that appeared to be dead.
Normally you would throw in the towel at this stage. Not Kim. His new idea was to get the regulation changed or at least get an exemption.
"According to WTO standards, why should a foreign investor have to have less than 4% if it is not a bank? It's counterproductive. So we asked the National Assembly to change the law or get a special waiver."
There were two approaches. The first involved changing the law. The second involved interpretation. The 4% regulation only applied to 'healthy' banks - which is why Newbridge had no problem getting control of the manifestly unhealthy Korea First Bank. So, "We tried to challenge the rule by saying this is not a healthy bank. Look at their balance sheet, look at their bad loans. Their bad loan obligations greatly exceed their ability to pay. We gained a huge head of stream on this during March and April."
"My father-in-law, TJ Park, was Prime Minister and I rarely talk business with him but I thought that this was a deal the country needed. President Kim went on record as saying foreign capital investment was a lynchpin of the Korean reform drive. There was precious little foreign investment going on, in part because of silly little regulations like this that put up a barrier to foreign investment."
Kim went to the Prime Minister and told him about this as a policy matter. In response the Prime Minister used the Deng Xiaoping quote, 'It doesn't matter if the cat is black or white so long as it catches the mice.' Why does it matter if you're a foreigner, if you've got the capital the financial sector needs as a whole?
Kim gained momentum. He also lobbied the Minister of Finance and FSC chairman Hun Jae Lee. "I got agreement from the triumvirate of economic tsars. They were either going to give us a waiver or change the law."
As a back-up plan, he had also began speaking to JP Morgan, but at this stage he was confident he could do the deal alone, and sure enough, the Supervisory Council of the FSC - a body made up of academics and businessmen - approved the move. When it votes the decision is usually rubber-stamped by the FSC chairman.
Kim and his team were elated. A huge evening of Korean drinking was arranged to celebrate. The Salomon team of Eugene Tan and Kenneth Shen kept up with Kim's Koreans whisky for whisky. "I was quite impressed at their staying power. But they're not Koreans."
He smiles that the Solly team was supposed to turn up for a meeting at 8.30am the next morning before catching a flight - but they didn't show. At about 11am, they called the hotel. Tan and Shen hadn't checked out. "They slept through their alarm calls and missed their flight," recalls Kim. "They didn't wake up until 3pm."
However, the celebration proved premature. Things were about to get as ugly as Tan and Shen's 'morning after'.
There was a shock cabinet reshuffle and Hun Jae Lee was replaced as FSC chairman by YK Lee. The new chairman was keen not to do anything too controversial in his first days in office - particularly after a local paper ran a story about how a 'vulture' fund connected to George Bush sought to acquire one of Korea's best banks 'illegally'. In a highly unusual move, YK Lee vetoed the approval of the Supervisory Council.
"Again I was stunned," says Kim. By this time, the due diligence on the bank was complete. Kim had spent $25 million, it seemed, for nothing.
It was back to the drawing board, in this case solidifying the relationship with JP Morgan. Carlyle had approached Corsair, JP's quasi-strategic banking investment fund, and had discovered it was mildly interested - although it had never done an Asian deal before. He now felt he could slot Corsair into the role Deutsche had held, and appease the FSC that way.
"In late April I went to visit Corsair in New York to go through our investment proposal. Rubenstein agreed to attend the meeting with me. He was in Europe and flew back to support me. We called on Nick Paumgartn and Ignacio Jayante and explained to them the merits of the deal. It was in that face-to-face meeting that we clicked and they really understood the thesis for the deal. They then became very excited about pursuing itwith us." In a meeting with the other partners in DC, however, he was told thatwith the NPLs at $2 billion the price of W9,000 a share was fartoo high.
So as he returned to Seoul he knew he was facing two separate battles. The first was to persuade the board of Koram to lower the price, and the second was to persuade the FSC that Corsair was a financial institution and thus did not breach the 4% regulation.
However, to complicate matters, JP Morgan had the same concern that Deutsche had. It couldn't own more than 49.9% of the structure and thus be considered Koram's holding company - and bailout source.
Kim remembers how demoralised everyone in the office became. Peter Clare, the MD from Carlyle in Hong Kong, Andy Shinn and fellow VP Ian Fujiyama had been sweating blood on this transaction for months, and the bureaucrats at the FSC were showing absolutely no sign of budging after Kim had shown them 30 different structures.
"We went to see the film 'Gladiator' separately, over two weekends. Gladiator became a tongue in cheek reference early on. Maximus's family got killed and there was an attempt on his life, yet he came back. Whenever I wanted to revive their flagging spirits I would shout the rallying cry of Maximus."
After many permutations, Kim shows me the final structure that was arrived upon with JP Morgan and FSC. It spreads over two pages and is almost impossible for the naked eye to understand.
"After many permutations, we decided we would be 50.1% and Corsair 49.9%. The trouble was that had we committed to Koram that we would give them W500 billion ($450 million). But Corsair's limit from their investment commitment was $100 million. So we had to ask do we share control even though JP is providing less than a quarter of the capital? That drove us to a structure where we created a main investment vehicle that would invest $200 million, and that was split between their $100 million and ours."
The remaining $250 million would come from small independent investment vehicles, that each held a small portion of stock. These vehicles were structured as trusts over which Carlyle did not have direct ownership, but in practice could control the votes. Carlyle syndicated out $200 million of equity in these to a variety of US funds as well as the Government of Singapore Investment Corporation.
The FSC was prepared to compromise on the 50/50 nature of the main investment vehicle and all seemed well. "The problem was that one smart FSC guy said 50/50 might work, but Corsair is still not a bank."
Obviously this was true. Corsair was a fund 100% owned by JP Morgan.
"We delivered them several opinions from various law firms that said how
Corsair could be deemed a financial institution based on their wholly owned status from JP and their mandate to do only bank investments."
It was another of those Gladiator moments. To make matters worse, Kim's father-in-law resigned as Prime Minister.
Kim then decided on a high-risk strategy: to go over the FSC's head directly to the Ministry of Finance and Economy, the FSC's great bureaucratic rival, and get them to see sense. He asked for a ruling whether the primary investment vehicle could be considered a financial institution. JK Lee, a director-general heading MOFE's banking division, agreed the deal was good for Korea and said the Carlyle/Corsair vehicle could breach the 4% limit.
But when Kim returned to the FSC with this news, they didn't appreciate his meddling, and insisted only they could 'request' a ruling - pure red tape for its own sake. Carlyle was able to complain loudly enough to anyone who would listen, and in the end he simply got his request letter to MOFE backdated and sent via a sympathetic bureaucrat at the FSC. Thankfully, this worked.
However, as if things weren't challenging enough, a new bombshell beckoned.
Koram had committed to launching an $80 million convertible preference share issue to boost its BIS ratio before the end of the half-year. Kim committed to buy $40 million of this, hoping JP
Morgan's Corsair fund would take half of this commitment. But the day before the convertible launched, Corsair informed Kim their investment committee wouldn't approve the $20 million.
"Of course, the inference we drew was that they were out of the deal
altogether. They had been on board for more than a month a half and they had never indicated they wouldn't go forward. We thought the deal was unravelling."
After a soul-searching call with the brass in DC, Carlyle opted to put in place a bridge loan to cover Corsair's erstwhile $20 million. Kim had tried to ask Koram to only accept half the $40 million commitment, but that had only sent the bank's managers into a frenzied panic.
So the $20 million was committed by the Carlyle partners themselves - including Kim - out of their own personal funds. The partners' money had to be transferred from Washington DC to
Cayman to Labuan to Koram's New York branch. "It turned out it was a Muslim holiday in Labuan, and our bankers had gone away. We had to call these people out of their prayer sessions to help us coordinate this." The situation degenerated to farce when the money was apparently 'lost' for a few hours somewhere between Labuan and New York.
Strangely, the near-disaster ended up bolstering, not eroding, JP Morgan's support for the overall acquisition. "Our decision to step up showed them our commitment to the deal. JP Morgan know that if we hadn't stepped up we wouldn't have the deal we have today."
The decision on the convertible was important for another reason: price. These shares were priced at W5,000 each, and by purchasing these it helped Carlyle lower its average cost per share. By this stage, Koram's stock had declined to as low as W6,500, and the bank's board and their financial advisor Goldman Sachs were seeking a premium, to assuage public opinion about selling to a foreigner.
The two weeks of negotiations on price in August were typically Korean, which is to say they were tough. But in the end Carlyle agreed to buy the shares at W6,800, which made the Koram board look good in the eyes of the general public. In reality, its average cost per share (including the convertible preferred shares) was W6,586, which was a discount to the market price.
Other arguments continued until the end of August, including one over board seats. Carlyle insisted on seven out 13. Koram argued it should be six. Carlyle ultimately got five seats and could designate who would sit in two others.
"Effectively we have seven and we feel comfortable," says Kim. "This means we can control M&A and strategic decisions, capital-raising exercises, management changes, signing off on business plans. It means we can control our exit. So that was an absolute must for us."
So after all that, and with the final close in October, was it worth it?
"We have the most well capitalised bank in Korea with the cleanest balance sheet," he says. "Potential bad loans will be over 100% covered. Every dollar of our capital and every dollar they earned this year go towards provisioning so that by the end of this year, they'll have close to W2 trillion ($1.8 billion) provisioned.
"Nearly 50% of Koram's shares are traded by foreign fund managers and these people are sophisticated enough to respect transparency and adequate provisioning. So they will recognise that this is perhaps the cleanest bank in Korea with great earnings upside."
While Carlyle doesn't disclose its return expectations on individual deals, it is known that it has made annualised returns of 35-40% on previous transactions. In this case, that sort of return would equate to selling its 40.5% Koram stake after three years for $1.5 billion, making over $1 billion of absolute profit.
"We've had several big investments such as United Defence," says Kim. "I think this has a chance to be a big winner. The sheer size of our investment is huge, so the dollar return could be big."
He is currently spending most days at the bank. "We are very heavily involved and will continue to be so for the next several months. This is like being a new homeowner, who has just bought a home. You don't just move in. You go in and do the inspection, see what holes need patching, whether a new coat of paint is required or structural renovations. That's the period we're in right now. We had a good sense of the bank from the outside, but it's another thing altogether once you come in."
Koram is a high-end retail bank, with loans to small and medium sized enterprises. Kim wants to expand the bank's asset management and credit card businesses, and leverage the bank's core earnings.
But, he says: "We play a bridging role. We're in a period of uncertainty about Korea's will to reform and most importantly about the NPL situation. Because of those uncertainties I think the big international banks are reluctant to jump in and buy. That's why the two major control-sales both went to financial investors and not banks."
For Kim and Carlyle it is truly a landmark deal. Says Carlyle boss, David Rubenstein: "It is significant to us for a couple of reasons. One it is the largest deal we've done in Asia. It is also a transaction where we've gained control, which are the types of transaction we said we would do. Two, it is the largest equity transaction we've done globally. So that shows how committed we are to building our business in Asia." It was also one of the few successful transactions involving a foreign acquirer in Korea this year. Says Kim: "This is the only major deal by a foreign acquirer. Every other deal has fallen down -
Daewoo Motor, Hanbo Steel. Deals are just not getting done in Korea."
Kim is quick to point to how much support he got for this deal: "It was a mammoth team effort," he comments. "This deal couldn't have been done without everyone in the team giving 100%."
His boss and mentor, Rubenstein, seeks, however, to give credit where it is due: "It's really a testament to Michael's determination that this deal got done. Clearly this transaction happened thanks to Michael. There are very few people around who could have got this deal done."
Perhaps as a reward, Kim has been elevated to President of Carlyle Asia, and will run the business from Seoul.
Rubenstein's analysis is accurate. Without Kim - with his unique skill-set and sheer determination - this deal probably would not have got done. When compared to the Koram Bank deal, robbing Fort Knox itself, as Goldfinger did, was an easy task.
